Nouriel Roubini: From Macroeconomic Visionary to Reflexive Crank

by: Tom Brown

As the cycle turns higher, Nouriel Roubini is returning to his role as a reflexive, tendentious crank. Dr. Doom was in classic form in BusinessWeek last week in his interview with Charlie Rose. Some highlights, along with some comments from yours truly. [Emphasis added]:

What happened to all the toxic assets?

Some of them have been written down, but the policy response has been pray and delay. Many banks are still carrying these assets and loans on their books at face value of a hundred cents on the dollar.

He can’t really believe this. No sane person can. The real estate crackup began in earnest in 2007. Since then, lenders have had to generate audited financial reports three times—for 2007, 2008, and 2009. Does Roubini believe there’s some kind of conspiracy among lenders, auditors, and regulators that’s allowing banks to keep their distressed assets marked at par all this time? That’s not just mistaken, it’s delusional.

How long will [mortgage borrowers] be under water?

A long time. Prices for homes have fallen by 30 percent from the peak. Prices of commercial real estate have fallen by 40 percent. They may be stabilizing, but prices are not going to go up 30 percent or 40 percent anytime soon. Therefore many of these bad assets have negative equity, meaning the value of the assets is lower than the value of the mortgage or the debt on it. People are going to walk away from their homes.

Are “going to” walk away? Er, Nouriel, the housing bust has been going on for awhile now. Borrowers have already defaulted in large numbers. For years. It’s been in all the papers! At this point, home prices don’t need to rise for defaults to slow, they just need to stop falling—which Roubini himself admits is happening.

Aren't [underwater borrowers unilaterally defaulting] now?

They're doing it increasingly. People refer to it as jingle mail. You put the keys in an envelope, send it back to your banker. It's happening on a massive scale. Especially in the U.S., if you walk away from your home when the value is below the value of your mortgage, they cannot go after you to recoup the difference between the two.

Roubini’s blowing smoke! No one disputes unilateral default has been going on for awhile. But borrowers are now suddenly “doing it increasingly” and “on a massive scale?” Really? Data please. Unilateral defaults are very tough for an outsider to identify. We’ve looked for statistics on them for months, and haven’t been able to come up with reliable numbers. For all anyone knows, those “jingle mail” stories are mostly an urban myth. If anything, unilateral default could be on the decline as borrowers realize lenders are tending to put off foreclosure rather than try to dispose of properties in a crowded market, and prefer borrowers stay in their houses in the meantime and maintain them. Oh, and depending on the state, lenders can go after defaulted borrowers for any deficit balance.

Other than raising interest rates, what should the government do?

You need tighter supervision and regulation. The Dodd bill is not enough. Institutions that are too big to fail are becoming even bigger. [For example,] JPMorgan took over WaMu and Bear Stearns. So if they're too big to fail, they're too big. We should break them up. They're also becoming increasingly too big to be bailed out...

Roubini seems weirdly obsessed by the big banks. If he doesn’t want to out-and-out nationalize them, he wants to break ‘em up. I’m no fan of size in the banking business, either, but this notion that systemic risk would somehow be reduced if, say, JPMorgan Chase were broken up into its constituent parts is plain crazy. The company’s derivatives unit, for example, would be “systemically important” whether it’s a unit of mighty Morgan or if it were a standalone boutique. (Roubini is right that the Dodd bill is useless, however.)

Nouriel Roubini has been broadly wrong about the economy, the financial system, and the stock market for--how long has it been now?--the past 18 months or so. I hope he stays negative. And when Charlie Rose and CNBC stop calling, we’ll know it will be time to worry.